Investment Products/Vehicles 101

Below is a simple breakdown of each investment product for educational purposes and also the risk associated with owning each product along with their associated characteristics. Although there are more investment products than listed below, we believe these are most important for you as an investor to understand.

Common Stock(Equity):

Often referred to as equity, common stock represents ownership in a publicly traded company. It entitles you as an investor to a portion of the company’s earnings and allows you to receive dividend payments when paid out. Historically, common stock has been the most rewarding asset class over the long-term allowing investors to see a higher Return on Investment(ROI) in comparison to fixed income or money market instruments. It is also an effective tool against inflation in order to preserve growth of principal and to protect your overall purchasing power. The associated risk of holding common stock is that you as an investor can lose the entire principal of your initial investment in the event the company has to liquidate due to bankruptcy.  This is because common stockholders have the lowest priority behind preferred and bondholders.   

Fixed Income(Bond): 

Fixed income is another term used to describe bonds and is considered to be one of the more secure investments one can make. Bonds are debt instruments issued by companies to raise capital to fund projects and when purchased do not give you ownership in the company such as a common stockholder. You are now a creditor to the company meaning you have lent money for a set period of time with agreed upon fixed interest payments. On a specified maturity date, the borrower(company) is obligated to return the full principal you originally invested which is usually $1K. Historically, bonds have returned less for investors in comparison to other asset classes such as common stock. They are considered to be more secure due to the fact that within the payment structure or in the event of bankruptcy; bondholders have priority over common stockholders and preferred stockholders.

Preferred Stock: 

Think of preferred stock as a hybrid between fixed income and equity. You still obtain ownership in the equity part of the firm but unlike common stockholders, the right to vote is usually limited or not available. Preferred stockholders receive fixed payments but also enjoy the potential for the price of equity to appreciate in value. Likewise, preferred holders also have priority when it comes to dividend payments issued over common stockholders. Common stock historically has earned investors more over the long-term, but preferred holders fall in between common stockholders and bondholders when it comes to priority in the event of bankruptcy or earnings payouts.

Money Market Fund: 

Depending upon who your online broker is, you might find your idle cash being swept into a money market fund to help you earn some extra dollars while your cash is sitting there. Money market funds invest strictly within the framework of highly-liquid short-term investments with high credit ratings. This includes products with fixed interest payments such as commercial paper, CDs, and government issued debt. This can be very beneficial to you while you decide which securities you actually want to invest in as it can provide a stable return in the meantime.

ETF: Short for Exchange Traded Fund, ETFs are currently one of the more popular investment products for investors to get started with and now there are thousands to choose from to fit your investment thesis. The flow into ETFs has increased by trillions of dollars over the last several years. An ETF trades like a common stock on the exchange where the price of each share is subject to change during the course of trading hours. It is a security that encompasses various different stocks often tracking an underlying index which is where it draws similar comparisons to a mutual fund. SPDR S&P 500 ETF(SPY) is perhaps the most popular ETF for investors and ETFs are a guaranteed means by which to gain indirect exposure to a diversified portfolio through one single security.

Mutual Fund: A mutual fund shares many similar characteristics to an ETF in that it allows an investor to obtain indirect access to a diversified portfolio of different stocks and bonds. The primary difference between an ETF and a mutual fund is the fact that mutual funds do not trade per unit of share throughout the course of a trading day on an exchange historically. The mutual fund has evolved over the course of the last several years but is usually marked by an active management style requiring higher fees in comparison to the low fee passive management style of the ETF.